In addition, the associated ECB working paper suggests that this type of regulation would allow for rental housing prices to increase less abruptly during the boom, an issue that policymakers in several countries of the euro area have attempted to handle via price regulation (an alternative that could generate price distortions).
Persistence of democratisation following transitory economic shocks plays an important role in the theory of political institutions. This column tests the theory of democratic tipping points using rainfall shocks in the world’s most agricultural countries since 1946. Negative rainfall shocks have a strong and transitory effect on agricultural output, but a persistent positive effect on the probability of democratisation even after ten years.
The recent history of democratic (non-)transitions in the world’s most agricultural countries indicates that transitory events can have enduring effects on democratic institutions. When lower rainfall led to below-average agricultural output in these countries, countries ruled by authoritarian regimes were more likely to democratise and more likely to be democratic ten years later.
The shape of the effect of rainfall on the probability of democratisation indicates that the effect is through agricultural output. The agricultural economics literature finds an inverted-U-shaped effect of rainfall on agricultural output. In the theory of Acemoglu and Robinson (2001, 2006) we build on, transitorily lower output raises the probability of democratisation, and transitorily higher output lowers the probability of democratisation. Hence, the inverted-U-shaped effect of rainfall on agricultural output should translate into a U-shaped effect of rainfall on the probability of democratisation. We find this to be the case. Moreover, our results indicate that rainfall shocks tend to produce the largest change in the probability of democratisation when the estimated effect of rainfall on agricultural output is largest.
Figure. Effect of rainfall on real agricultural output and on the probability of democratisation
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